Human Capital & Careers

Health-Benefit Cost Hikes Hold Steady

They're still far outpacing inflation, but at least the size of the annual increase has stayed the same for three straight years.
Alan RappeportNovember 19, 2007

New evidence suggests that health-benefit costs may be stabilizing. A new report from Mercer Human Resource Consulting finds that cost increases have held steady this year and could actually slow in 2008.

A Mercer survey of 3,000 employers revealed that health-benefit costs rose by 6.1 percent, or $7,983 per employee, in 2007 — marking three consecutive years of that exact percentage increase. Mercer predicts that costs will rise in 2008 somewhere between 5.7 percent and 8 percent, depending on the degree to which organizations in the aggregate alter their benefit-plan structures.

Although steady increases are more encouraging than cost spikes, the rate of growth is still more than twice the rate of inflation. “Health cost growth is outpacing wages and material costs and eroding business profitability,” the report said.

Other research firms have also predicted that health-benefit costs could go higher next year. Last month Towers Perrin said companies will spend 7 percent more on health care in 2008, reaching an average of $9,312 per employee. A year ago the accounting firm projected a 6 percent increase. Companies paid for an average of 78 percent of their employees’ coverage this year, it added.

And Hewitt Associates, a human resources firm, estimated that employers’ health costs will swell by 8.7 percent next year. Hewitt said 2007 brought average cost increases of 8.7 percent for health maintenance organizations (HMOs), 3.9 percent for point-of-service (POS) plans, and 2.4 percent for preferred provider organizations (PPOs).

Health-benefit consultancies — which have their own incentives for telling organizations to get their programs in order — suggest that companies shift toward less-expensive, consumer-driven plans. Such programs, which have tax-saving options but shift more of the cost of healthcare to employees, now cover 5 percent of all employees with coverage, up from 3 percent last year, according to Mercer.

Employers say these plans, also known as Health Savings Accounts (HSAs) and Health Reimbursement Accounts (HRAs), create incentives for using lower-cost health-care alternatives and are particularly effective in curbing excessive payouts for prescription drugs. According to The Segal Company, a benefits consultancy, companies are spending nearly 9 percent percent less on prescription drug plans now than in 2003.

Despite the success of consumer-driven plans, Mercer projects that their adoption will slow in 2008. “The next big wave of adopters is still waiting to be convinced that the plans work before they commit,” said Blaine Bos, a partner at Mercer.

Employers could also be waiting to see if political pressure for universal or mandated healthcare will further complicate their plans. Mercer’s survey finds that employers are “luke warm” about these approaches, as they want to retain flexibility and control over their plans. And according to Bos, employers may be “mistrustful of any kind of government mandate.”